February 1, 2018
Billy Deitch - OAK HC/FT
I love my job.
Okay, it has only been three weeks. But it’s love nevertheless.
Based in San Francisco (my home for nearly a decade), I joined Oak HC/FT to help immerse the firm even deeper in the west coast entrepreneurial community. All day long, I get to think and talk about innovative ways to improve the wellbeing of millions of Americans. Sure, like in any job, there are frustrations and fatigue. But what fundamentally gets me out of bed every day is that I’m constantly learning. Learning about new technology, about new business models, and about new approaches to solving problems that truly matter — it’s a really fun way to earn a living.
As I begin my new role at Oak HC/FT, I wanted to share some of my own perspectives on the healthcare market and what I expect we may see in the coming year.
Companies being created today will save healthcare in the United States. We all know the reality that the US spends far more on healthcare than any other high-income country while providing consumers with a materially worse level of care. Meanwhile, it is crystal clear that the federal government is too dysfunctional to be counted on to help solve these intractable problems. Fortunately for all of us, entrepreneurs are stepping up and attacking every nook and cranny of the healthcare ecosystem to improve quality and lower cost. It might be dramatic, but it’s not an understatement to say that our future depends on their success.
The capital raising environment may become a bit more circumspect than it has been in the past. Despite record levels of venture capital fundraising and sky high asset prices, I have recently had multiple conversations with entrepreneurs who have begun to appreciate the risks associated with maxing out valuation in early funding rounds. While a big valuation reduces dilution and creates sexy headlines, it also increases the risk of down rounds if execution isn’t perfect (terrible for morale), makes attracting top talent difficult (limited equity upside), and makes exits more challenging to achieve (impossible to generate a satisfactory return). As an investor, I’ll admit it behooves me to highlight this, but I personally know of several unicorn companies that regret raising at peak valuations and I expect entrepreneurs to increasingly put less emphasis on headline price.
Tax reform is already beginning to impact behavior. Strategics — both traditional healthcare players and pureplay tech companies — are going to be flush with cash in 2018 thanks to corporate tax cuts. This isn’t breaking news of course, but I am surprised to hear the degree to which senior HR executives have told me the purse strings on their 2018 budgets had been loosened. As a result, I expect innovative healthcare solutions selling to large employers to see an uptick in adoption as their customers look to put dollars to work. Furthermore, M&A coiffeurs will grow and fuel more deal activity, particularly large transactions that move the needle.
Speaking of regulation and reform, the future of ACA remains as uncertain as ever. After the failure of “repeal and replace,” the Trump administration has embarked on a death-by-a-thousand-cuts strategy against the ACA, the deepest of which was the repeal of the individual mandate via last month’s tax bill. While enrollment for 2018 only declined slightly from the prior year, the longer-term sustainability of Obamacare is totally unclear and won’t be for several months. Predicting what will happen has become so difficult that the topic rarely even comes up in conversation, largely because there isn’t much more you can do than shrug your shoulders.
Nevertheless, this lack of clarity does not appear to be doing anything to stifle innovation and enthusiasm in the sector. There is so much we don’t know about what will happen in 2018. Will the ACA survive? Will blockchain find a sustainable use case? How will this week’s partnership announcement by J.P. Morgan, Amazon, and Berkshire Hathaway play out (and will other large tech companies follow with big bets of their own)? The answers to these and a host of other questions are unknown, but it is encouraging that this uncertainty has not deterred entrepreneurs from searching for big ideas. The amount of ingenuity our team witnessed at the J.P. Morgan Healthcare Conference last month was almost overwhelming — and incredibly exciting! At the end of the day, disruption in a market is a great thing for both entrepreneurs and investors. And let me reiterate that Oak HC/FT cannot wait to partner with the companies that see clarity through this confusion.
With that in mind, let me issue an invitation: if you find yourself in San Francisco (or LA, Phoenix, Seattle, Portland, Denver, Salt Lake, Austin, or anywhere else west of the Mississippi!), please do drop me a note. I look forward to learning from you!